Adidas Net Beats Estimates as Profitability Widens to Record

By Julie Cruz -
May 3, 2013

Adidas AG (ADS) reported first-quarter
profit that beat estimates and said its gross margin widened to
a record, sending the shares to the highest level ever.

Net income climbed 6.5 percent to 308 million euros ($403
million), the Herzogenaurach, Germany-based sporting-goods maker
said today, exceeding the 298.5 million-euro average estimate of
15 analysts in a survey. The shares surged as much as 6.2
percent to 84.44 euros, the highest since trading began in 1995.

“It’s a very strong start to the year and there could be
some upside to their 2013 forecast,” said Sebastian Frericks, a
Frankfurt-based analyst at Bankhaus Metzler. “The gross margin
saved the day. Revenue wasn’t great, but this was expected.”

Gross margin widened to 50.1 percent from 47.7 percent on
higher pricing and a bigger proportion of sales from the
company’s own stores, where profitability is higher. Analysts
predicted a gross margin of 48.6 percent. Adidas, which had
record soccer sales last year helped by the European
championships, is pushing other categories because of the lack
of a major soccer event in 2013.

“We delivered strong margin progress, which is our top
priority for the year,” Chief Executive Officer Herbert Hainer
said in the statement. “We delivered stable revenues, despite
running against high prior-year comparisons due to the sell-in
of event-related products for the London Olympics and the
European Football Championships as well as facing a continuation
of macroeconomic challenges in Europe.”

Sales Drop

Adidas was up 5.7 percent at 84.05 euros as of 9:21 a.m.
The shares have gained 35 percent in the past year, giving the
shoemaker a market value of 17.6 billion euros.

First-quarter revenue fell 1.9 percent to 3.75 billion
euros. That missed the 3.76 billion-euro average estimate of 15
analysts. Revenue in western Europe slid 6 percent on a
currency-neutral basis, led by declines in Spain, Italy and the
U.K. Sales gained 6 percent on a currency-neutral basis in
greater China, while climbing 12 percent in Latin America.

The company introduced the Energy Boost shoe for runners in
February and expects Reebok to return to growth this year as it
expands the brand’s activities in the fitness market. Reebok
sales tumbled 16 percent in the first quarter.

‘Key Story’

Adidas reiterated it expects sales to increase at a “mid-
single-digit” percentage pace excluding currency shifts in
2013, while the operating margin will improve to almost 9
percent from 8 percent in 2012. Adidas is targeting an operating
margin of about 11 percent by 2015.

“Continued operating margin improvement is the key story
for the financial year 2013,” Christopher Svezia, an analyst at
Susquehanna Financial Group, wrote in a report on April 30.
“There is upside to guidance on the margin, particularly if
sales come in stronger than expected in the second half.”